Performance Measurement System Development - Coursework Example

Thus, transfer prices make it easy for the subunit manager to process information and make decisions. In a transfer system that is well designed, the manager puts more focus on optimizing the performance of the subunit, and in so doing, the performance of the company is optimized (Datar, Horngren & Rajan, 2012).

Usually, there are three forms of transfer prices; market-based transfer prices, cost-based transfer, and negotiated transfer prices. Each form complies with organization and performance assessment at a different level. The transfer prices to be used rely on the environmental conditions and specific objectives of the company. In this case, the form of transfer to be used is the market-based transfer prices. In order to develop a performance measurement system for the firm, the following conditions must be met. First, a market or its substitute must exist for the intermediate product. However, this condition is generally not fully met. In most cases, there are a number of comparable products with different prices present. Second, the transaction of the firm’s divisions may not have a significant effect on the market price. Third and final, the market price may not be altered by impacts owlishly induced or reliant on the quantity of demand or supply. For instance, distortions caused by temporary rebates. It is important to note that these conditions are only perfectly fulfilled in an irreproachably competitive market (Wintzer, 2007).

When these conditions are fulfilled in the best way possible, then the better the market price will be modified for the transfer price. When market-based prices are used perfectly in a competitive market, both coordination and performance evaluations are optimally attained. However, in reality, markets are generally imperfectly competitive. Generally, in markets that are imperfectly competitive, there are various transfer prices. The range is dependent on the benefits from internal trade and the market prices. All the divisions involved have the incentive of trading internally within this range (Wintzer, 2007). 

Information to be Preserved and How That Information Can be Represented to Outside Investors

Segmental information has to be preserved in a company; however, in the past few years, multinational companies have been forced to disclose their segmental information. Segmental information fulfills some of the needs of the company since different nations and industries have different growth opportunities, profit potentials, and levels of risk, different capital needs, and different levels of investment returns. To the investors, segmental information can be represented in a manner that does not fully disclose the performance of a company’s division. Segmental reporting entails breaking down the company into its segments or its constituent parts and reporting financial data or information on a disaggregated basis for every segment (Alam, Sallehhuddin & Talha, 2005).

When the operating segments are centered on geography rather than services or products, they can be aggregated and represented as a whole to the outside investor. Where aggregation of geographic segments is allowed, separate disclosure of assets and revenues for every material foreign to the nation is needed. The disclosure permits the users of the financial statements to evaluate the dependence of the entity on consumers based in one specific nation. It is important to note that not all operating segments require to be reported separately. Operating segments are regarded as reportable if they go beyond the quantitative thresholds (Price Waterhouse Coopers, 2008).

Information on the operating segment is supposed to be reported separately if the following conditions are fulfilled. First, the reported revenue (inter-segment and external) is 10 percent or more of the aggregated revenue of all the operating segments. Second, the total amount of the reported loss or profit for the segment is 10 percent or more and greater than the reported combined profit of all the operating sections that failed to report a loss or greater than the combined loss of all the operating sections mentioned a loss. Third and final, the assets of the segments are 10 percent or more of the collective assets of all the operating sections ((Price Waterhouse Coopers, 2008)). Therefore, the firm should take into consideration all the mentioned things when representing segmental information to outside investors.